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Indian Economy Industry and Infrastructure GS Paper III

Industrial Policy and Liberalisation

Indian industrial policy for UPSC — IPR 1948 and 1956, the licence raj, the New Industrial Policy 1991, public sector reform, MSMEs, IIP, core industries and PLI.

SyllabusGS III · Effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth

By UPSC Notes Editorial Team 10 min read Updated Oct 2026 #economy#industry#industrial-policy

Prerequisites: Planning and NITI Aayog · External Sector — the 1991 crisis

The Hook: An Idea Whose Time Had Come

Connect: Historical Episode → Concept

On 24 July 1991, with India in the middle of a balance of payments crisis, the government placed the Statement on Industrial Policy before Parliament on the same day as the Union Budget. In his Budget speech, Finance Minister Manmohan Singh borrowed Victor Hugo’s line that no power on earth can stop an idea whose time has come. The policy abolished industrial licensing for most industries, cut back the public sector’s reserved domain and opened the door to foreign investment.

The question 1991 raises is the question this topic answers: why did India build a tightly controlled industrial system after independence, and what changed when it was dismantled?

The Core Concept

Phase 1: The State as the builder (1948–1965)

Industrial Policy Resolution (IPR), 1948 declared a mixed economy. It reserved arms and ammunition, atomic energy and railways for the Union, gave the State the lead in basic industries, and left the rest to private enterprise under regulation.

Industries (Development and Regulation) Act, 1951 created the licensing system: setting up, expanding or relocating an industrial unit needed a government licence.

Industrial Policy Resolution, 1956 — often called India’s “economic constitution” — aligned industry with the Second Plan’s emphasis on heavy industry (the Mahalanobis model). It classified industries into three schedules:

ScheduleIndustriesRole of the State
A17 industries (e.g. arms, atomic energy, iron and steel, heavy machinery, coal, mineral oils, railways, air transport)Exclusive responsibility of the State for new units
B12 industries (e.g. some minerals, machine tools, chemicals, road and sea transport)Progressively State-owned; private sector may supplement
CAll remaining industriesLeft to the private sector, subject to licensing

Phase 2: Control and the “licence raj” (1965–1990)

  • Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 — large business houses needed approval to expand.
  • Foreign Exchange Regulation Act (FERA), 1973 — foreign companies were generally required to dilute their equity to 40%; some, such as IBM and Coca-Cola, left India in 1977.
  • Reservation for small-scale industries — many products could be made only by small units.
  • Industrial Policy Statement, 1977 — emphasised small, cottage and district industries; District Industries Centres followed in 1978.
  • Partial easing in the 1980s, but the core of licensing and controls remained.

Outcome: a diversified industrial base and self-reliance in many capital goods — but also low productivity, technological lag, inefficient public enterprises, and slow growth often called the “Hindu rate of growth” (a phrase coined by economist Raj Krishna).

Phase 3: The New Industrial Policy, 1991

The 1991 policy had five pillars:

PillarChange
DelicensingIndustrial licensing abolished for all but 18 industries (a list since cut to a handful — such as alcoholic drinks, tobacco products, defence-related equipment, industrial explosives and hazardous chemicals)
Public sectorIndustries reserved for the public sector cut from 17 to 8 (now only atomic energy and railway operations); disinvestment of government equity; sick PSUs referred to the Board for Industrial and Financial Reconstruction
MRTPAsset thresholds for MRTP companies scrapped; prior approval for expansion of large houses abolished. The Competition Act, 2002 later replaced the MRTP Act, with the Competition Commission of India
Foreign investmentAutomatic approval for foreign equity up to 51% in a list of high-priority industries; FERA replaced by FEMA in 1999
Foreign technologyAutomatic permission for technology agreements in high-priority industries
graph LR
    A[IPR 1948: mixed economy] --> B[IDRA 1951: licensing]
    B --> C[IPR 1956: Schedules A, B, C]
    C --> D[MRTP 1969 and FERA 1973: controls]
    D --> E[NIP 1991: delicensing, FDI, PSU reform]
    E --> F[Competition Act 2002 and FEMA 1999]
    F --> G[Make in India 2014 and PLI 2020]

Phase 4: After 1991 — manufacturing policy

InitiativeYearAim
National Manufacturing Policy2011Raise manufacturing to 25% of GDP and create 100 million jobs; National Investment and Manufacturing Zones
Make in IndiaSeptember 2014Investment facilitation, ease of doing business, 25 focus sectors at launch
Production Linked Incentive (PLI) schemes2020 onwardsIncentives linked to incremental sales of goods made in India; extended to 14 sectors
New Public Sector Enterprise PolicyBudget 2021-22Bare-minimum PSU presence in four broad strategic sectors; PSUs in other sectors to be privatised, merged or closed

Strategic sectors (2021 policy): (1) atomic energy, space and defence; (2) transport and telecommunications; (3) power, petroleum, coal and other minerals; (4) banking, insurance and financial services.

MSMEs

  • Governed by the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
  • In 2020, the classification moved to composite criteria — investment in plant and machinery (or equipment) and annual turnover — and the separate thresholds for manufacturing and service enterprises were merged. Registration moved to the online Udyam portal. The thresholds have since been revised upward; check the latest notification before quoting numbers.
  • Reservation of products for small-scale industries, a feature of the controlled era, was phased out completely by 2015.

Measuring industry

IndexCompiled byKey facts
Index of Industrial Production (IIP)National Statistics Office (MoSPI)Monthly; base year 2011-12; sectors: mining, manufacturing, electricity (manufacturing has the largest weight)
Index of Eight Core Industries (ICI)Office of the Economic Adviser, DPIITCoal, crude oil, natural gas, refinery products, fertilisers, steel, cement, electricity; together about 40% of IIP weight; refinery products carry the largest weight

Effects of liberalisation on industrial growth

PositiveConcerns
Faster GDP growth and larger private investmentManufacturing’s share of GDP has stayed broadly flat; services led growth
Competition, quality and consumer choice“Jobless” or low-employment growth in organised manufacturing
FDI inflows, technology and global integrationPremature de-industrialisation risk; import dependence in electronics
Rebuilt forex reserves; dismantled licence rajRegional concentration of industry; MSME stress under competition

Memory Anchors

1991 in five Ds: “Delicense, Disinvest, De-MRTP, Door to FDI, Direct tech deals.”

IPR 1956 numbers: “17 – 12 – rest” → Schedule A has 17, Schedule B has 12, Schedule C has the rest.

Eight core industries: “Coal Crude Natural Refinery — Fertiliser Steel Cement Electricity” → “Cows Can Never Run Fast; Sheep Can Easily.”

Public sector today: “Atom and Rail” — only atomic energy and railway operations are reserved.

One-line Mains hook: “1991 replaced a licence to produce with a licence to compete.”

For Prelims

Facts worth a mark
  • IPR 1948: mixed economy; IDRA 1951: licensing. IPR 1956: Schedule A (17), Schedule B (12), Schedule C (rest).
  • NIP 1991: licensing kept for 18 industries; public-sector reservation cut from 17 to 8 — now only atomic energy and railway operations.
  • Competition Act, 2002 replaced the MRTP Act, 1969.
  • FERA 1973 → FEMA 1999.
  • IIP base year 2011-12; compiled by NSO. Eight core industries — about 40% of IIP; refinery products have the highest weight.
  • MSME classification: composite investment + turnover criteria since 2020; Udyam registration.
  • PLI schemes cover 14 sectors.

For Mains

  • Dimensions: growth vs employment; manufacturing vs services; public vs private sector roles; regional balance; MSME competitiveness; import dependence and self-reliance; ease of doing business.
  • Keywords: licence raj, crowding in, disinvestment vs strategic sale, premature de-industrialisation, global value chains, missing middle (few medium-sized firms), formalisation, ease of doing business, production-linked incentive.
  • Value-addition: IPR 1956 as the “economic constitution”; NIP 1991’s five pillars; National Manufacturing Policy 2011 target of 25% of GDP from manufacturing; the 2021 strategic-sector policy as the logical end of the 1991 public-sector reform.

Common Traps

Trap #1: 'IIP is compiled by the RBI or DPIIT'
The IIP is compiled by the National Statistics Office (MoSPI). The Index of Eight Core Industries is compiled by the Office of the Economic Adviser, DPIIT.
Trap #2: 'Railways are fully reserved for the public sector'
Only railway operations remain reserved. Private and foreign investment is allowed in railway infrastructure (such as construction, rolling stock and freight terminals).
Trap #3: MRTP and the Competition Act
The 1991 policy diluted the MRTP regime; it was the Competition Act, 2002 that replaced the MRTP Act and created the Competition Commission of India.

Practice

Prelims

UPSC Practice · Prelims GS I Qind-1

With reference to the New Industrial Policy, 1991, consider the following statements:

  1. It abolished industrial licensing for all industries except a short list.
  2. It increased the number of industries reserved for the public sector.
  3. It removed the requirement of prior government approval for investment by large companies under the MRTP Act.

Which of the statements given above is/are correct?

  1. A 1 only
  2. B 1 and 3 only
  3. C 2 and 3 only
  4. D 1, 2 and 3
Solution

Statement 1 is correct — licensing was retained for only 18 industries. Statement 2 is wrong — the reserved list was cut from 17 to 8. Statement 3 is correct — the asset-based MRTP thresholds and pre-entry approval for large houses were scrapped.

Answer: B

UPSC-pattern practice question
UPSC Practice · Prelims GS I Qind-2

At present, which of the following areas are reserved exclusively for the public sector in India?

  1. A Atomic energy and railway operations
  2. B Arms and ammunition, atomic energy and railways
  3. C Coal, lignite and mineral oils
  4. D Atomic energy, defence aircraft and warships
Solution

After successive dereservations, only atomic energy and railway operations remain reserved for the public sector. Option B was the 1948 reservation; coal, lignite and mineral oils, and defence aircraft and warships, were removed from the reserved list after 1991.

Answer: A

UPSC-pattern practice question
UPSC Practice · Prelims GS I Qind-3

Consider the following statements:

  1. The current base year of the Index of Industrial Production is 2011-12.
  2. The eight core industries together carry about 40% of the weight of items in the Index of Industrial Production.
  3. Among the eight core industries, refinery products carry the highest weight.
  4. The Index of Industrial Production is compiled and released by the Reserve Bank of India.

How many of the above statements are correct?

  1. A Only one
  2. B Only two
  3. C Only three
  4. D All four
Solution

Statements 1, 2 and 3 are correct. Statement 4 is wrong — the IIP is compiled by the National Statistics Office under MoSPI; the Index of Eight Core Industries is compiled by the Office of the Economic Adviser, DPIIT. So three are correct.

Answer: C

UPSC-pattern practice question

Mains

UPSC Practice · Mains GS III 15 marks · 250 words Qind-m1

Three decades after the New Industrial Policy, 1991, manufacturing has not become the engine of employment that liberalisation promised. Critically analyse the effects of changes in industrial policy on industrial growth in India.

Solution

Introduction: The 1991 policy dismantled licensing, shrank the public sector’s reserved domain and opened India to foreign investment. It transformed the business environment — but the expected manufacturing-led jobs boom has been limited.

Body:

  • Achievements: higher and more stable growth; private investment and FDI; global firms in automobiles, pharmaceuticals and electronics assembly; competition and consumer choice; end of the licence raj.
  • Shortfalls: manufacturing’s share of GDP broadly flat; services led growth; low labour absorption in organised manufacturing; “missing middle” of medium firms; MSME stress; import dependence in electronics and capital goods; regional concentration.
  • Reasons: rigid factor markets (land, labour), infrastructure gaps, high logistics costs, credit constraints for small firms, policy uncertainty.
  • Policy response: National Manufacturing Policy (2011), Make in India (2014), PLI schemes in 14 sectors (2020 onwards), MSME reclassification (2020), the strategic-sector PSU policy (2021), PM Gati Shakti and the National Logistics Policy.

Conclusion: Liberalisation removed the barriers to entry; the next phase must remove the barriers to scale — land, labour, logistics and skills — so that industrial growth becomes employment-rich.

UPSC-pattern practice question

Quick Revision

PointOne-liner
IPR 1948Mixed economy; arms, atomic energy, railways with the Union
IDRA 1951Industrial licensing
IPR 1956Schedules A (17), B (12), C (rest)
MRTP 1969 / FERA 1973Controls on big business and foreign equity
NIP 199118 licensed industries; 8 reserved for PSUs; 51% automatic FDI in priority industries
TodayOnly atomic energy and railway operations reserved
Competition Act 2002Replaced MRTP; CCI
IIPNSO; base 2011-12
Core eightAbout 40% of IIP; refinery products highest weight
PLI14 sectors

Key Takeaways

Key Takeaways
  1. India’s industrial policy moved from State-led control (1948–1990) to market-led competition (1991 onwards).
  2. 1991 rested on delicensing, public sector reform, MRTP dilution and an open door to foreign investment and technology.
  3. The unfinished agenda is employment-rich manufacturing — addressed by Make in India, PLI and logistics reform.
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